EOT Position Update – July 30, 2008

| July 30, 2008

July 30, 2008

Market Snapshot

The Dow Jones Industrial Average just closed at 11,583.  Volatility continues to roil the markets with 100+ point moves occurring on an almost daily basis.

Big news this week.

Merrill Lynch added to the craziness by announcing a small offering of $8.5 billion.  They also decided to hold a fire sale of more than $30 billion worth of CDOs for $6.7 billion (less than 22 cents on the dollar).  The buyer, Lone Star Funds.  Oh, and get this, Merrill is financing 75% of the purchase price.

This move gets the nasty securities off their balance sheet.  I can’t help but think Merrill is selling out at the bottom. . . .  I wonder if they’ll give me the same deal they gave Lone Star?

The US Dollar continued to show strength over the last 5 days.  Falling oil prices are helping.  Next week’s Federal Reserve meeting will no doubt be an interesting event. I’m expecting the same thing we get out of Washington every time. . . . Lots of hot air and rhetoric followed by very little action.

Now for the trade updates.

Position Updates

 CLHB January 2009 $95 Calls (QPBAS)
We rolled out this new trade last Friday.  The option traded as high as $3.20 on the day of the trade and then pulled back.  Everyone should have had time to get a position established.  Resistance will be found near $85 and $90.  Support will be at $72 and $68.

  GT January 2009 $15 Puts (GTMC)
After breaking the first resistance levels earlier this week the stock has retreated a bit.  Tomorrow the company announces second quarter results.  This is about to get really interesting.  Support levels are 15 and 12.50.  Resistance is 20 and 22.

  AHGP October 2008 $30 Calls (AQPJF)
AHGP reported in their earnings announcement this week that they raised their quarterly cash distribution by 33% over the year ago figure.  The board also said it will attempt to increase these distributions by 6% to 8% every quarter through 2010.  In addition, a couple of major steel companies reported blowout earnings for the last quarter which suggests rising demand for coal in the months ahead.  The stock rallied hard on the news climbing into the low $30s.  Resistance is 32.25 and 35.  Support is at 26 and 25.

Parting Shots…

Saving American Mortgages – Covered Bonds

Ever hear of a covered bond?

If you haven’t, don’t be surprised.  Most investors have no idea what a covered bond is.  Despite their unpopular status with the investing community, they’re all the rage in Washington.

This week Treasury Secretary Paulson introduced a way to save the American homeowner.  Instead of allowing banks to issue mortgage securities backed only by their good credit, he’s introducing the idea of using covered bonds.

All the big boys quickly rallied to his support.  Bank of America (BAC), Citigroup (C), JP Morgan Chase (JPM), and Wells Fargo (WFC) all are supporting and backing the plan.

Covered bonds are used extensively in Europe.  The market over there is estimated at mover than $3 trillion dollars.

So, what is a covered bond?

Instead of relying just on the financial institution issuing a mortgage backed security, covered bonds add another layer of protection.  They identify specific assets to back the bonds . . . assets that can be sold in the case of default.  It doesn’t seem like much but that simple change gives covered bonds higher ratings and therefore lower interest rates.

Amazingly, only two firms in the US have ever sold covered bonds . . . Banc of America and Washington Mutual.

It’s a beautifully simple way to improve the mortgage markets . . . it will be interesting to see how long it takes for them to gain widespread acceptance.

Category: EOT Update

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